Financial Planning and the Value of a Financial Advisor
Financial planning involves taking a comprehensive look at a client’s entire financial picture and coming up with a strategy on how to achieve their long-term and short-term goals. Topics addressed can include cross-border planning, retirement planning, investment planning, risk management, tax planning, college savings, cash flow, debt management, employment benefits optimization, and estate planning among others. A holistic approach and broad overview of one’s finances helps to ensure decisions are made in an efficient way when building wealth and achieving goals.
Financial planning is a process rather than a product and is best used as a long-term method to stay on track as life is dynamic and each client’s goals and situation will evolve over time.
Our financial planning process
Understand – Gain an understanding of the client’s personal and financial circumstances along with their unique goals and objectives.
Analyze - Analyze the client’s current course of action and explore alternative routes to ensure they are on the optimal path to achieve their goals.
Act - After thorough analysis, a financial plan and recommendations are delivered to the client. Implementation responsibilities are assigned between the client and advisor depending on the engagement.
Monitor – Financial plans are continually monitored and updated to track progress and help clients stay on track.
Quantifying the value of a financial advisor
The benefits of a good financial advisor and financial planning advice are often difficult to quantify.
A study done by Vanguard found that when implementing some best planning practices in wealth management, advisors can potentially add an additional 3% in net annual returns when implemented properly. Compounded over long-time horizons this 3% net annual return can result in a substantial increase in overall wealth when compared to naively investing and not following known best practices. However, this value add is likely to come at irregular intervals based on a range of variables and is likely not to be expected annually. The extent of the value will of course vary based on each client’s unique circumstances and the way their assets are actually managed. Nonetheless, this gives a general idea of the potential impact prudent financial advice can have on a client’s bottom line.
Source: Vanguard
High level these modules of Vanguard Advisor’s Alpha strategy can be described as follows:
Suitable asset allocation: A strategic asset allocation is the backbone of any investment strategy. It is the portfolio’s percentage allocation to various asset classes such as stocks, bonds, cash equivalents, and others. This allocation decision is driven by an investor’s financial situation, return objectives, risk tolerance, tax situation, time horizon, and liquidity needs. We believe a solid investment plan is guided by an Investment Policy Statement (IPS) which outlines how a portfolio is to be managed. Being appropriately invested based on your individual situation can add significant value opposed to naively guessing at it or following the latest fads in the news.
Cost-effective implementation (expense ratios): Being cost conscious when selecting investment options and utilizing lower cost options can have a significant impact on net returns. Just because a fund/ETF has a higher cost associated with it does not mean the returns will be higher than lower priced alternatives. On the contrary, higher priced active fund managers often fail to beat their benchmarks.
Rebalancing: The objective with rebalancing is to maintain the desired risk/return characteristics of the chosen strategic asset allocation. Over time if left alone the portfolio will likely “drift” from the original allocation to perhaps something riskier (equities grew from 60% to 80% of the portfolio for example). The objective with rebalancing strategies is not to maximize return but rather minimize risk and maximize risk adjusted returns.
Behavioral coaching: Helping an investor get out of their own way is one of the biggest value-adds an advisor can offer. Investing one’s life savings and going through a bear market cycle can trigger a strong emotional response for even the most stoic investors. It is crucial to not give into emotion but rather make rational decisions. A good advisor talks a panicky investor off the ledge and discourages them from selling at the bottom of a bear market. Such a decision to sell can be devastating to an investor’s long-term investment plan as they are locking in losses. Timing when to get back in the market for the rebound is notoriously difficult to do in practice. We believe it is time in the market that matters most opposed to timing the market.
Asset location: The types and nature of accounts utilized to hold assets is an important consideration that can add to the effectiveness of your investment plan. Certain investments are more effective in certain types of accounts. For example, fixed income investments that produce a lot of current income tend be more efficient in tax advantaged accounts in that they don’t add to an investor’s current taxable income. Rather tax is typically paid on the money when withdrawn from the account at later point in time. Consideration of asset location is even more pronounced for cross-border investors in that certain tax advantaged accounts such US IRA’s, Roth IRA’s, 401-k’s etc. may not be given the same tax advantaged recognition in your country of residence that they receive in the United States.
Spending strategy (withdrawal order): For investors who hold assets across a variety of account types (taxable, tax-deferred, tax-free) how and the order in which you withdraw assets from the varying account types can have a significant impact on wealth over time.
Total-return versus income investing: With the low interest rate environment in the global economy, chasing higher yields in “income producing” investments such as longer duration bonds, high yield bonds, and dividend paying stocks can increase portfolio risk due to increased exposure to changes in interest rates (higher duration), increases in credit risk and volatility (more exposure to high yield bonds), and decreases in overall diversification relative to market cap weight portfolio at the sub-asset class level. A total return approach considers both income and capital appreciation. This approach potentially allows for less risk, better tax efficiency, and a longer lifespan for the portfolio than an income-only approach.
This is just one study that attempted to quantify the actual impact working with a financial advisor can have on investor outcomes. More qualitative and hard to measure advantages of working with an advisor also exist. The value of having a trusted partner you can lean on to think through complex problems/decisions that has a firm understanding of your background and situation shouldn’t be underestimated.
Add in cross-border complexity
It is evident that making strategic financial planning decisions can have a significant impact when building overall wealth and on the likelihood of achieving financial goals. For those individuals living abroad and dealing with a cross-border environment, the importance of prudent planning becomes magnified. A misunderstanding of how two countries interact via tax treaties and totalization agreements, being unaware of tax filing obligations and ramifications of financial decisions, and remaining uninformed of the most efficient ways to save using the most efficient account types and investment solutions available can cost individuals dearly. Each individual has a unique situation and goals which can be best addressed through a formal financial planning process that allows them to spell out their goals, make quantifiable assumptions about what it will take to achieve those goals, and develop a concrete action plan to achieve them.
Conclusion
Financial planning is a valuable exercise that can add significant value for those who adhere to it. We at Borges Financial specialize in the financial planning nuances of the US/Norway country pair, helping Norwegian-American expats navigate the financial complexities that come with a life abroad and how to best plan for their future financial goals in cross-border environment.
Reach out to us for a complimentary intro call if you would like to explore our services further.
